Mike Oliver has spent a great deal of time on the coalface of capitalism and has some interesting things to say about the current economic crisis.
In years gone by I was a radical libertarian/objectivist fomenter in the U.S. In fact in the mid-1970’s when the late Chris Tame of the Libertarian Alliance spent a month or few crossing this once great land, he spent a few nights under my roof. He was a great guy and I miss him.
In any case in the years since my crusading lapsed (I used to be editor of The New Banner, perhaps the first widely read national objectivist/anarcho-capitalist periodical in the U.S.) I since went to ground. I became a futures market specialist and then a market analyst (for hire to major asset management entities such as multi-billion dollar mutual funds). I did my work and looked at the world from a market perspective.
In the summer of 2007 as a small hedge fund manager/analyst-for-hire I realized that the interventions of the U.S Fed under Bernanke were engineered to hold up/support the S&P500. I realized that if that persisted that the downside move that I had expected in the market ‘correction’ would turn into something other than a mere correction… as indeed it did.
The lovers of statism (and of we the people) decided to pull out all the plugs and defend the market at each and every low – to try to fake reality. Instead they super-charged the downside. What would have been a normal correction in the market ballooned into a disaster. Why?
Benanke allowed in summer of 2007 for an asset class never previously allowed to be used as collateral in fed borrowings by financial institutions, and even expanded what institutions could come to the Fed. In effect the Fed was “pricing” this debt (sub prime mortgages, etc.) at a level such that it would not have to hit the market and be priced openly and fairly.. The Fed was apparently afraid of the real consequences of seeing it priced openly. So they in effect took it off the market and froze it at the Fed window as “acceptable collateral” but as an unpriced asset. Hence from that point forward these sorts of assets on bank books were not “priced” in an open and market manner. Hence those who wanted to invest in the bank were uncertain as to the value of these assets. Hence uncertainty arose as to any and all bank valuations.
Uncertainty breeds doubt and fear and finally the collapse we saw in October and November. The lack of clarity of valuation – created by the Fed’s motherly and smothering love of “the people” in effect created the doubt and uncertainty that cascaded into the spiral we later saw in October of 2008. Oh sure, the chain of statist actions that helped to build and blow-up these malevolent factors date from before Bernanke, but he was pivotal at his unique moment in time.
Well, for the record my small hedge fund was up nearly 10% in 2008 while the lovers of “trend following” and statism sank some 30-40%. Good riddance.
Then came the onslaught of statist bandages and programs etc. And therefore here comes the final wave of statism – fully open to “caring” for us all in the wake of the failure of “capitalism.” And all the while many in the press and public accept the notion that the “market” failed and government has and will be our saviour. But reality ultimately will betray the fakery. There are already too many in the financial markets and in the financial press who realize the sequence of events, and who will not be fooled. The Charade has reached its zenith. The seemingly perpetual ascendancy of the State is in fact a paper tiger. Yes, the State will appear to rise as The Saviour, but its salvation and credibility will not weather the storm that it has itself created.
For more details of this mess, I strongly encourage folks to read “The End (of Wall Street)” by Michael Lewis.
Given the facts in the linked article, it would seem that a few folks (certainly) knew what was going on, but their desire/ability to shout that the sky was falling was deterred a bit by the fact that they were making fortunes on the deal.
When, it seems, that all morality/fiduciary responsibility is lost on those who play these games, aren’t ALL involved (the traders, speculators and the government) to blame equally? More importantly, isn’t the real message that the Average Joe putting his money in anything other than his mattress a HUGE risk, and that ordinary citizens that don’t have money to lose, should be avoiding?
It just seems to be broken in so many ways, with the governments doing all that is possible to make it worse, but greed (and greed by ignorant masses) has to have some pain to alter the behavior.
The masses have a tendency to bring torches and burn down the castle, rather than accept blame and alter their behavior. I just don’t see how the “free market” can adjust itself when those involved (regardless of where you look) are thieves and scoundrels.
Not quite sure how to respond to Mrs. du Toit on this one, and even once heavily edited, this might be a bit rambling. I’ll set aside the Lewis article, and address a few comments directly.
Lots of people know what was/is going on, and have done for years, and they’ve been getting fat on it; however, the beneficiries are not just the ‘few folks’, but every investor who has participated in the market. Early adopters in Ponzi schemes do pretty well too, even if they don’t know they’re ‘victims’ of an unscrupulous investment manager. Yes, the guys ‘in the know’ have the ability to enrich themsleves, but in doing so, the really intelligent ones will also enrich the investors whose money they run. There is a name for people like this. They are called ‘financial geniuses’.
You call these folks out on their moral and fiduciary responsibility. If I’m the manager running the equities portion of a large public employee pension fund, my fiduciary responsibilty includes meeting agreed returns necessary to fund that pension’s actuarial needs. Those needs are pretty much dictated by – the public employees’ representatives (and by extension, the employees themselves).
Government? Well, I won’t beat that one up. Again.
Speculators are the only ones who have got clean hands. *REAL* speculators have responsibility to themselves alone. Speculators (and to some degree, hedgers) fulfil a vital market function and have NO moral obligation to buoy up an overpriced market. Their only reason to do so would be if it’s in their interest to do so. Their job is to feed on the poor decisions of others. In the UK, people are less squeamish about calling this ‘exploiting’ mispricings in the market, but that’s precisely what it is.
If there had been more speculators speculating around the time TARP I was being floated, we’d probably be in much better shape right now. Why were there so few speculators? They’d been shut out of the game when the US Government banned short selling. The fix was in.
“It seems to be broken in so many ways” – well yeah, sure. It’s the government that broke it, and is still breaking it. And will keep on breaking it, because intervention is the raison d’etre of government.
I would hope that we, as libertarians seek to exploit broken government by exposing the ways that is broken for our (political) benefit. Our benefit being the form of government we prefer.
Why is that different from capitalists* exploiting broken markets to their (economic) benefit? Their benefit being to put some dollars in their bank account?
The only disconnect is that every economic (and political) activity has a corresponding risk. The failure here is that society as a whole has been artificially protected from any real understanding of risk, and instead of re-learning the lesson that risk is a factor of existence, the American public has just decided it wants to obscure that link even more, and have mommy kiss it all better. Cue analogy that mommy is a plague carrier.
Until people re-learn the lesson that risk is inherent in existance, we’re going to be subject to periodic, severe whiplash like this; and the greater the gulf between the perception and reality of risk, the greater those dislocations will be.
If you believe that torch-wielding mobs have any legitimate reason to burn something down, they should emulate the British of 1812 and burn Washington down. That’s not because I’m a Brit and work in the financial industry, it’s because Wall Street has for the most part been doing what it’s meant to do – buy low, sell high, pocket the difference. It (for the most part) functions in the regulatory environment in which it finds itself.
* Capitalist – n. you, me, anyone who doesn’t live in a barter economy.
Anecdote. My 10-year old daughter impressed me yesterday. She asked me why ‘you and mom are worried about the economy’, and we naturally got onto my favorite topic, the evils of overregulation. Her conclusion was that America is like this:
(Link)
The point she made is that the more you try and mold the ball into a perfect sphere, the more distorted ‘bulges’ appear.
Every time the subject come up I feel it necessary to point out that the sub-prime market itself was bolstered by US government action over decades and several administrations. If that first step doesn’t happen likely none of the rest does, either.
I agree with the above and am not disputing that the government created the monster, but we put pretty clothing on it by our actions. The mortgages (and other bad paper) that we’re bailing out are because there are people who participated in the sub-prime lending, without any awareness or sense of the risk involved. I’m speaking of the people who bought a house with less than desirable income and credit ratings to qualify… and are now SHOCKED! SHOCKED! that they didn’t make a windfall profit and their homes/investments are in foreclosure (or SHOULD be).
We got a fixed rate mortgage when we could have saved big $$$ by going with a flexible rate, but that was RISK we couldn’t afford. But the risk has been mitigated by forcing lenders to be “friendlier.”
The more we bail out, the more it seems as if the only way to come out ahead is to take the same stupid risks and behave irresponsibly. Behaving responsibly seems to be how to lose in these times.
That is what I mean by a loss of morality in all of this. If the only way to get ahead is to be a jerk and whine a lot, with your hand out, then what’s to keep everyone from doing that?
If the ONLY criteria is “coming out ahead” there are lots of ways to do that without ethical considerations.
Spanish bank Santander is doing very nicely, thank you. I’m delighted by this news, and grateful to Spain’s superbly regulated banking system.
If regulation is so evil, why is Santander doing so well?
I think any smart British person will move their money into foreign owned banks and let the incompetent, worthless British banks die.
The welfare sponging British banks are a liability to the British taxpayer, for the sake of Britain, let us hope they dies a well deserved painful death.
We don’t need our own banks, as we live in a global economy.
So then I assume every Spanish bank is doing fine right? If regulation is why Santander is doing fine and as I assume the same regulations apply to every Spanish bank…
I suspect a serious flaw in your logic.
Santander is making good money because it operates in a heavily regulated market that’s more of a cartel than anything else. Spanish banks have huge charges, make their customers use premium phone lines to transact business and basically enjoy the protection of the state.
“And therefore here comes the final wave of statism…”
“The Charade has reached its zenith.”
“The seemingly perpetual ascendancy of the State is in fact a paper tiger. Yes, the State will appear to rise as The Saviour, but its salvation and credibility will not weather the storm that it has itself created.”
Could I be so rude as to ask for those sentences again without the aesthetically pleasing language? What exactly are you predicting?
More state intervention followed by less state intervention. Succinct enough?
mike,
So many commenters here are depressed at the futility of waging war against the state. While I admire and respect many of them (ie Ian B, Paul Marks) they are worried about the wrong thing.
The state cannot rewrite the laws of nature or of mathematics. We do not need to destroy the redistributionist totalitarian state. It cannot possibly survive. Our biggest personal concern (certainly mine) is to minimize my own injuries when it collapses. But I certainly don’t need to worry about how to collapse it. It WILL fall.
The question is ‘then what?’ That is really the only thing we need to be worried about. We will be greeted with a vacuum and only one shot at an open goal. Fretting about how to achieve something that is inevitable is a serious distraction from preparing for the one opportunity we will have.
I would like the (now totally unpreventable) collapse of the Federal Reserve System (which enables the Income Tax system which enables the redistribution socialist state) to be a decisive one. It most certainly will be. Everybody on the planet needs to understand and fear the combination of politicians and currency. I can think of no case in which fiat currency did not ultimately end in tragedy. Unemployment will (already is in my area) go through the roof and all of the Weimar dollars in the world won’t be an anesthetic. After we have made that case to all of the people who until the collapse have been too busy living day to day to think about it, I hope we can go back to a constitutionally restrained government. I could see us restarting the constitution if a trans-apocalyptic SCOTUS is willing to strike down some preposterously rationalized precedent. If they are not, we may end up starting anew in a rather messy place.
The GM assembly plant in my neighborhood just shut down at an upfront loss of about $300,000,000/year in local payroll receipts alone. That doesn’t include all of the feeder plants owned by sub-contractors. No amount of unemployment payed in Weimar dollars will fool anyone. This is a once in two life-times opportunity and so many of us are still worried about how to bring down nationalist (as opposed to true federal) government or worse yet, how to save it.
“More state intervention followed by less state intervention. Succinct enough?”
No. Look here: ‘the final wave of statism’ – since when did ‘final’ mean ‘less’? And in any case, even if the wording was changed slightly – the claim that we will soon see ‘less state intervention’ requires more justification than that the chairman of the Federal Reserve did something wrong or that some ghastly trend-following hedge-fund managers lost a lot of money.
In short what is required is an actual explanation with the use of plain English and stipulation to defined terms for that claim to be taken as anything more than a pretty kite. Vague, Nietzsche-redolent prophecies of the imminent demise of statism are of no use unless they are backed by explanations commensurate to the nature of the problem.
As it happens, I believe that for all that the crisis of regulatory statism has been unmasked, there aren’t enough people even in the right places looking at the ugly thing, never mind being able to recognize it as ugly.
“There are already too many in the financial markets and in the financial press who realize the sequence of events, and who will not be fooled.”
Excuse me, that may be true to some extent in the U.S. but it completely ignores the existence of newspapers such as the Financial Times in England, which, as Paul Marks often points out, is run by the same sort of people who occupy government departments – to put an ethical name to them ‘collectivists’.
The entrenchment of the State in civil society is not temporary in a sense relative to the time span of a few generations, and it’ll take an awful lot more than a bit of ‘unmasking’ here and there to remove or at least reduce it by any significant degree.
Midwesterner: obviously I was too busy writing my last comment to have seen yours until I had already posted.
And I must confess, your grasp of the certainty about the collapse of statism heralds a confidence in an understanding I lack. Presumably you are confining your remarks to the U.S?
When you say…
“The state cannot rewrite the laws of nature or of mathematics. We do not need to destroy the redistributionist totalitarian state. It cannot possibly survive.”
… you skirt around two terribly large aspects of the problem which are that although particular institutions may be destroyed, the thought (and more specifically, anti-thought) of a great many people, and the culture in which such thought has been nurtured will remain. Unless those two aspects are also tackled, then statism will simply continue albeit with a different set of institutions.
I understand that you see this as an opportunity to try to do something about those two other aspects of the problem, but the scale of the task is simply enormous.
I’m all for getting on with it, but I do want to be sure I’m using the right tools in doing so.
The medium of exchange will unquestionably fail. At this point it is not just that they won’t do the right thing. I can’t think of anything they could do to save the Federal Reserve System.
Creating new centrally synchronized economies out of whole cloth takes time. It is the Fed system that will collapse. Can you think of any way the redistribution state can survive without a central currency? In order to survive, statists will have to build a new medium of exchange and compel everyone to use it without any exceptions. That will take time and be against the will of a lot of seriously disillusioned people. Even the most determined socialist central statists will demand that the currency they are bribed with have value.
The way the Federal Reserve System was created was an illusion called ‘the gold standard’. I say it was an illusion because almost everybody was deluded into believing is was gold backed. It was not. It was merely pegged to gold and confidence in the state to run a safe and sound economy. They wrung 1/2 century out of that confidence game before it failed. We spent ~10 years on a totally fiat system before going to (under Reagan!) the ‘US Gov Debt‘ standard, ie T-bills. Check that graph in the link. The Fed System is now about to burst just like every previous ponzi scheme.
The system is finished. No options left, it is done. But that reality is both terrifying and a unique opportunity.
No, I am not specifically confining myself to the US. Obviously, the $ is the reserve currency of the world. Scary enough, it is also the soundest one capable of being a reserve currency. No other currency could handle the inflow of ‘investment’ without becoming a bubble as well. The Euro is trying, though. 🙂
There is no zealot like a convert, there is no anti-smoker like a former smoker, there is no scorn like a lover spurned. The people who have been accepting all of the promises from the statists will be the first in line with rope when the statists fail. It is the way it always has and always will be. Building the ‘new’ meta-context is what we are doing here and now. It truly astonishes me the number of people, even very smart people at the top of society, don’t understand what is going on and are scared s-less. We have their attention.
The article is a good one.
However, Bernake was carrying on the principle of Alan Greenspan – if there is a danger of a collapse, issue more money. Although, yes, Bernake even seems to have regarded a big decline in the stock market as cause to throw in more money (but then so did Greenspan as far back as 1987).
I do not doubt that Bernake invented lots of new tricks (he prides himself on that sort of thing), but the principle was that of Greenspan – Ayn Rand was right to throw the plate in Alan Greenspan’s face all those years ago (nonaggression principle violation though it may have been).
And, of course, each time there is a bailout the problem is made worse.
It became huge – and the statists were right to say that allowing the banks to collapse would have created great suffering (even if the depositors, under 100, 000 Dollars, had been paid off).
What the statists did not say (because they do not know?) was that increasing the money supply (including the massive increase in the Monetary Base in order to support the “broad money” bank credit) will cause even more suffering.
The article is a good one.
However, Bernake was carrying on the principle of Alan Greenspan – if there is a danger of a collapse, issue more money. Although, yes, Bernake even seems to have regarded a big decline in the stock market as cause to throw in more money (but then so did Greenspan as far back as 1987).
I do not doubt that Bernake invented lots of new tricks (he prides himself on that sort of thing), but the principle was that of Greenspan – Ayn Rand was right to throw the plate in Alan Greenspan’s face all those years ago (nonaggression principle violation though it may have been).
And, of course, each time there is a bailout the problem is made worse.
It became huge – and the statists were right to say that allowing the banks to collapse would have created great suffering (even if the depositors, under 100, 000 Dollars, had been paid off).
What the statists did not say (because they do not know?) was that increasing the money supply (including the massive increase in the Monetary Base in order to support the “broad money” bank credit) will cause even more suffering.
The question is ‘then what?’ That is really the only thing we need to be worried about. We will be greeted with a vacuum and only one shot at an open goal.
That’s very optimistic. Collapses of this sort are always, always followed by tyranny. If we can’t head off the collapse by pruning the state back to some functional size we’re in for some dark years.
Even tyranny needs to pay its thugs, Eric. You are just plain wrong. In almost every case there is a window of opportunity. In some cases like Russia/Yeltzin, the opportunity is squandered. In some cases like Argentina, the chaos of the collapse reforms as a (socialist) democracy, again an opportunity lost. In the Weimar Republic, it took years for the Nazis to gain control. In Chile, redistributionist inflation leading to massive nation wide strikes led a swing in what was perceived to be the exact opposite direction. Ukraine’s currency collapse was followed by a botched attempt at privatisation. Romania was another one that made an initial move in a free market direction.
I am sure there are many more cases where a currency and the government that depended on it collapsed and opportunities were lost for lack of preparation or knowledge. I stand by my statement. Tyranny does not follow collapse, but chaos often does. We will have one shot at an open goal. If we haven’t laid our groundwork now we will lose that chance.
Between the czars and the communists, there was another government unprepared for either the opportunity or the threats it faced.
My statement that you quoted is not optimistic, it is a recognition of limited options. Your apparent determination to stake everything on saving the United Socialists of America in the hope that they can be reformed is what is optimistic. The dollar will fail. Redistributive vote buying will fail along with it. That will be our one and perhaps only opportunity to restore the federated governments of the states that still exists as a formality underneath this national beast.
Unlike all of those other places that have had their opportunity and failed because they could not fill the void quickly enough, the US and the UK have both retained underneath their government’s socialist shells the constitutionally restrained structures, symbols and capabilities of previous free market, property respecting governments. When our window comes, we have an almost insurmountable advantage over the socialists. Our US national government rules through extorting states to follow orders. The UK is simpler yet, it extorts MPs to follow orders and replaced real hereditary lords with sock-puppets. Both of those things can be undone in seconds.
When the national government is no longer capable of paying off its minions and puppets, the state governments will resume their function as it was before income taxes were taken and held for ransom. Will every state be ideal? Of course not. But there will be 50 different states not 50 uniform states. In the UK, MPs will once again poll their constituents and vote their will. Not ideal but a great improvement, unquestionably. When governments collapse, they tend to reincarnate to an earlier form. The earlier form of US and UK is a millennium expanding the recognition of individuals’ life, liberty and property.
When people can no longer get OPM from the government, they will defend what is rightfully their own all the more tenaciously.
“What will happen”.
Well “it depends”.
If the Republicans (sorry but the L.P. just is not a player) produce a valid anti bailout candidate, for example Mark Samford, at the elections of 2012 then the voters will face a choice.
And they will be voting for a new House of Representatives and a third of the Senate.
But the work must start NOW – no more extra spending, no more “deals”.
“But Obama and co will force it into effect anyway” – let them.
Let it be their wild spending, and their wild spending alone – and let them take the consequences of its failure.
But there will only be political consequences if an alternative from principle is argued – and argued NOW (not wait till 2010 or 2012).
“But what if the people are so brainwashed that they relect the Democratic Congress in 2010 and reelect the Congress and Obama in 2012”.
Then the game changes.
One would have to stop thinking about saving the whole country – and go for saving some of it (as an example of freedom to the world).
“But that is Stars and Bars talk”.
No it is not – there is no slavery, so “you are Confederates” would not only be BS it would be seen to be BS.
Especially if States like Alaska (rather far north) leave the Union.
The chances of convincing the American military to go and keep States in the Union by force are close to zero – as there is no great moral issue of slavery to use on those seeking to leave the Union.
But let us hope it does not come to that – work for victory in 2010 and 2012, but victory will only come from “clean” candidates who have always opposed bailouts and deals.
Question asked what am I getting at by postulating some sort of crisis of Statism as a result of recent collapse of “regulated capitalism.”
As an objectivist (not an advocate of any form of statism, limited or otherwise) I hold that the primary reason that most anti-state movements, such as they were or are, have had little if any effect on the continued existence of Statism is that those movements usually shared some more fundamental ethical or philosophical belief structure witht their enemies. Too many anti-statists take on the Statist via “economic” or “civil libertarian” level arguments, seldom denying the validity of the more primary and unproven tenets that always undergird Statisms. Primarily ethical, but also epistemological and metaphysical tenets that imbedded within any argument for government – these notions are not attacked as invalid. HOWEVER, I do think that Rand changed that. She built (despite her anti-libertarian protestations) or rather discovered a structure of concepts, a philosophy, that undercuts Statism – below the knees. Objectivism has provided modern anti-libertarians (some of them anyway) with a means of attacking the more fundamental or underlying assumptions of statism. Only when one gets beneath the economic arguments and provides a potentially anti-statist person an understanding of the real and deeper error of statism, does one then set in motion a person and perhaps a movement that is not deterred or fooled by the “moral” arguments of the Statists – namely that they are always workign for the common good, that the collective needs outweigh those of a mere individual etc. For example, the utilitarian sort of “libertarian” who attacks statism on the “it does not work” basis finds himself constantly trying to explain how the market would do this or that chore or project better. An incremental and superficial attack on Statism at best.
What libertarianism needed was not provided by English libertarian writers of ages gone by, nor by the anarchists of the late 1800’s and early 1900’s (who with few exceptions were collectivists at root), nor provided by finely reasoned and quite accurate Misean arguments against Statism and the non-economics of statism. But what was needed was a philosophy that provided a foundation on which these lesser arguments can and should stand upon.
If one is my age (60) then one lived through the 60’s and knew all the names of “prominent” philosophers of that day – you know the deep thinkers that undergirded the mindless collectivists of that era – Marcuse, Sartre, etc. But pause a moment and look around – except for some classes run by ex-hippies of the 60’s at state run universities, those names are no longer on everyone’s tongues. But Rand and her thoughts have persisted and I argue grown in their audience – an observation that I think is beyond debate.
Her ideas were correct and in reality being correct (with reality) lends itself to success and duration. As one in the financial “community,” as it were, I see the rise of much much opposition to Government now. Oh yes, much of it is still girded in utilitarian premises – that “capitalism” works better than Statism,etc, but very much at the front of the opposition is coming from those who see beyond just the “economic” arguments and who are openly citing Rand and her philosophy (not the orthodoxy) as their reason for now understanding and opposing the new power grab by Statism. And it is explicit. One minor example was Stephen Moore’s article in the Wall St. Journal a month ago that pointed out that Rand (via Atlas Shrugged) had foreseen just such a collapse – based on philosophical errors that dominoed into political actions then economic consequences. That article prompted more positive responses than the WSJ has ever seen, and the ripples continue in those pages today. Even today’s editioral in WSJ cites a “strike” by those (individuals and businesses) who will not commit their personal assets now in an “economy” that is headed where ours is headed. They recognize that it will be a dead-end and instead have shifted their time preferences to “saving” or protecting their would-be investments from being committed to a failing situation. Cries of “mutual self sacrifice” have no effect on them.
As for this being a crisis that is historically pivotal, that is my conclusion as one who saw the dominoes falling as of summer of 2007. Who understood the why of the collapse and who now sees a political trend that will only take the process to yet another level of hell. While as a stock market and commodity market analyst I see potentials for rallies in these markets (counter trend) that might slow or stall the decline in the more obvious markets in 2009, the real world collapse – on Main St. as they say – will persist and worsen in 2009, and that sort of further collapse – in State revenues, etc. – will hasten an even greater power grab by government. A spiral. But this time the opposition will not be “loyal opposition,” because now the opposition is forming around a deeper set of concepts than mere “economic” criticism of Statism. This time I expect the crisis to be historic, the reaction by the state to be historic and revealing, and the opposition to have an underlying philosophical backbone this time. This time – it is different. Regards and good bye. – Mike Oliver (not to be confused with the prior well-known Mike Oliver of decades ago who sought to create “free countries” here and there around the world, never successful).